Options Action –
The discussion started out about Apple (AAPL – 441.81) as there is a developer’s conference next week. It was mentioned that on Friday 75,000 of the AAPL Weeklys traded and the at-the-money straddle is indicating a 3.5% move in the stock next week. Despite the high volume in the near dated options, this implied move of 3.5% indicates fairly low expectations around the event. Another indication that the market is yawning in front of next week is VXAPL which finished Friday at 29.06, much closer to the 2013 closing low of 26.11 than the closing high of 45.56.
The trade suggestion is reluctantly bullish and geared toward current owners of AAPL shares. Also this trade looks out to August expiration which will capture an earnings announcement in July. The trade is a 1 by 2 call spread combined with a long position in 100 shares of AAPL. The spread buys 1 AAPL Aug 475 Call at 10.00 and sells 2 AAPL Aug 500 Calls at 5.00 each. The result is a trade put on for even that can make an extra $25 a share on AAPL up to 500.00. For a little more clarity I included a payoff diagram that compares being long 100 shares of AAPL versus adding the 1 by 2 call spread to a long position in the stock. The blue line shows the profit or loss of just being long 100 shares of AAPL while the red line represents the spread combined with AAPL.
The next trade is on a company at the opposite end of the industry spectrum – General Motors (GM – 35.03). Shares of GM will reenter the S&P 500 this coming week. As it appears that GM is hitting on all cylinders (their pun, not mine) the trade recommendation is a bull put spread looking out to July. The suggestion is to sell 1 GM Jul 34 Put at 0.85 and buy 1 GM Jul 33 Put at 0.55 for a net credit of 0.30. The worst case scenario is GM dips below 33.00 at July expiration which would result in a loss of 0.70. The diagram below sums things up pretty well along with indicating where GM went out on Friday.
The final trade recommendation is on Toll Brothers (TOL – 33.57) and bearish in nature. The stock appears to be topping and heading to lower levels. The fundamental reason behind the bearish forecast is an outlook that includes higher interest rates along with higher costs for the homebuilders. The trade for TOL is a bear call spread using July options. This trade sells the TOL Jul 34 Call at 1.80 and buys a TOL Jul 36 Call at 1.00 for a net credit of 0.80. If the stock takes off to the upside the maximum loss would be 1.20 as shown below.